Rand breakout arrives as ZAR weakens vs Majors

A quiet week in the markets has passed us by, as we continue to wait on a bigger Rand breakout...

It was still a week of plenty action, as we continued to watch the economic recoveries taking place across the globe.

Was it going to be fast enough to save businesses? Was it going to filter down to third world countries?

And most of all, is it sustainable?

These are things we have to look into, as we try to project what the future, or at least the remainder of 2021, holds for the markets.

So let's get into the full review...

Before we get into the week, here were the biggest headlines from the 5 days:

• SAA & Mango - the two airlines have been on the skids for sometime, and it still remains a question of how to save airlines in this day and age?
• Biden Families Plan - the much anticipated taxing of the rich plan has been released...how does it stack up?
• Dollar & US Recovery - the USD responded well with more good economic news this week. Is the Dollar now out of the woods?

Now, to get back to the markets, on Friday before the week began, we issued our forecasts for the Dollar Euro & Pound:

Certainly interesting pictures for each, but the overall message was clear:

The Rand was due for a correction weaker, and it was coming soon against all the majors.

And so the market opened around R14.25/USD, R17.25/EUR & R19.80/GBP, with us awaiting clarity on those moves.

The big talking point for the week locally (apart from the Zondo commission) was the airline crisis facing SA, with SAA in business rescue and Mango heading the same way.

But by the end of the week, things had changed substantially...

SAA was the first SEO to go into business rescue, and on Friday, it exited back out of business rescue!

A significant portion of debt has been cleared by being transferred to another vehicle...and with that, the airline is "back" in business.

Mango too will continue to fly, as the government is assessing the future of SAA subsidiaries - including a R2.7bn allocation of funds which would include Mango, should parliament approve it.

And so the bailouts continue...is it sustainable?

Speaking of sustainable, the same questions are being raised as to Biden's American Families Plan which was announced this last week.

In a move of "tax the rich and distribute as we see fit", Biden announced massive plans:

• $225 billion toward high-quality child care and ensuring families pay only a portion of their income toward child-care services, based on a sliding scale
• $225 billion to create a national comprehensive paid family and medical leave program
• $200 billion for free universal preschool for all 3- and 4-year-olds, offered through a national partnership with states
• $109 billion toward ensuring two years of free community college for all students
• About $85 billion toward Pell Grants, and increasing the maximum award by about $1,400 for low-income students
• A $62 billion grant program to increase college retention and completion rates
• A $39 billion program that gives two years of subsidized tuition for students from families earning less than $125,000 enrolled in a four-year historically Black college or university, tribal college or university, or minority-serving institution
• $45 billion toward meeting child nutritional needs, including by expanding access to the summer EBT program, which helps some low-income families with children buy food outside the school year
• $200 billion to make permanent the $1.9 trillion pandemic stimulus plan’s provision lowering health insurance premiums for those who buy coverage on their own
• Extending through 2025, and making permanently fully refundable, the child tax credit expansion that was included in the pandemic relief bill
• Making permanent the recent expansion of the child and dependent care tax credit
• Making permanent the earned income tax credit for childless workers

That is a lot of numbers...

...and the final amount tallied at $1.8 trillion.

Without going into the detail, the bottomline is this: a lot of free education, services and more that are being prepared for mid-lower income individuals, and the tax increases on the wealthy are going to have to be what foots the bill.

Free stuff is great...or is it?

More like ominous socialism disguised in a sweet wrapper...

Getting back to the market, the fist half of the week was pretty chooppy, as we saw the Rand head to R14.43/USD, R17.41/EUR & R20.02/GBP...

… only to bounce back to stronger levels than where the week began!

And so we awaited a clear breakout in the last hours of the week...

And then in other news:

• Over in the US again, the Dollar has made a significant recovery in the latter half of the the week. This came as some kind of a reaction to the Biden tax & family plans, but also with big news on the GDP front, as the economy has started to hum. A 6.4% first quarter gain was big news, and it marked the second-fastest pace for growth since the second quarter of 2003 and was exceeded only by the reopening-fueled burst of Q3 in 2020.
• Despite this, the Fed remains pretty uncertain, with interest rates unchanged. Fed Chair Jerome Powell remained dovish, reiterating that interest rates will remain low until the Fed achieve their goal of long-term inflation (2%) and maximum employment.

To get back to the markets...

Thursday and Friday brought all the action, as the ZAR yoyo-ed against the majors!

Ultimately though, the close saw the Rand significantly weaker against all 3 markets, with the USDZAR touching R14.50, EURZAR @ R17.50 and GBPZAR at R20.11.

This was right in line with our forecasts from Friday, expecting the markets to bottom and push higher, although some target areas not fully validated.

And before you know it, we are looking into the 5th month of the year, with the first third of the year gone by in a flash.

As we look into this week, there are few events to keep our eyes on as triggers for more Rand volatility, including the infamous Non-Farm Payrolls:

• USA - Goods Trade Balance, Jobless Claims, Non-Farm Payrolls
• UK & EU - BoE Interest Rate Decision, Monetary Policy Statement & BoE Minutes

So again, lots to keep us occupied, apart from all the all social, political and financial upheavals going on.

Based on our analysis, we are expecting some more weakness, but will be watching some key levels (as depicted in our forecasts) to confirm direction for the weeks - and possibly months - ahead.

Watch this space...
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Look forward to hearing from you.

To your success~

James Paynter